Risk tolerance is how much financial risk you're comfortable taking with your investments, based on your ability to handle potential losses.
In Depth
Risk tolerance is a personal measure of your comfort level with financial uncertainty and potential losses. It's about balancing the desire for growth with the fear of losing your initial investment. Understanding your risk tolerance helps you choose investments that align with your emotional and financial capacity to handle market ups and downs. Someone with a high risk tolerance might invest in volatile stocks, while someone with a low risk tolerance might prefer stable bonds.
Example
Because Sarah has a low risk tolerance, she prefers to invest in more conservative options like mutual funds and bonds rather than individual stocks.